This document discusses market structures and pricing practices. It covers perfect competition, monopoly, monopolistic competition, and oligopoly market structures. For each structure, it describes characteristics, price and output determination in the short and long run, and examples. Perfect competition is considered the most efficient as it achieves allocative and productive efficiency. Monopoly is less efficient due to lower output and higher prices. Monopolistic competition and oligopoly introduce some inefficiencies through product differentiation and interdependence between firms respectively.
Key Diagrams for A2 Business Microeconomicstutor2u
1. The document provides advice on drawing effective diagrams for exam questions, including making diagrams at least half an A4 page, labeling axes clearly, and drawing diagrams at the appropriate technical level required.
2. It then lists 20 common diagrams that may be included in revision materials or exams, covering topics like diminishing returns, costs curves, revenue curves, perfect competition, monopoly, and oligopoly models.
3. The key messages are to practice common exam diagrams to improve accuracy, and to draw diagrams that match the technical specification required rather than oversimplifying the analysis.
This document provides an overview of monopoly market structure. It defines monopoly as a market with a single seller, no close substitutes for the product, and high barriers to entry. Barriers include legal protections like patents, economies of scale, and ownership of necessary resources. A monopoly faces a downward-sloping demand curve and sets price above marginal cost to maximize profits where marginal revenue equals marginal cost. This results in lower output and higher prices than under perfect competition, reducing consumer surplus and creating deadweight loss.
This document discusses market power and factors that lead to monopoly power. It provides examples of competitive markets and benefits of competition, such as lower prices and innovation. However, some markets fail to be competitive. The document then examines costs of monopoly power, such as higher prices and inefficiency. It also analyzes how firms with market power can extract consumer surplus. Finally, it discusses potential benefits of monopoly power and ways governments regulate monopolies.
A monopoly is a firm that is the sole seller of a product without close substitutes. It faces a downward-sloping demand curve and sets price above marginal cost. While a monopoly maximizes profits by producing where marginal cost equals marginal revenue, it produces less than the efficient quantity, resulting in deadweight loss. Governments address monopoly inefficiencies through antitrust laws, price regulation, or public ownership.
The document discusses the concept of perfect competition. It defines perfect competition as a market with many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition in the short run, firms are price takers and will produce at the price that maximizes their profits where marginal revenue equals marginal cost. In the long run, perfectly competitive firms will earn only normal profits as entry and exit will cause prices to adjust until average costs are equal to prices.
This document provides definitions for various business economics concepts. Some key points include:
- Abnormal profit refers to profits above normal levels due to barriers to entry preventing competition.
- Oligopoly is a market structure with a small number of producers where each considers the actions of others.
- Economies of scale refer to lower long-run average costs from increased output, while diseconomies are higher costs from outputs beyond the optimal scale.
- Barriers to entry protect incumbent firms by making entry difficult for new competitors.
A firm’s pricing market power depends on its competitive environment.
In perfectly competitive markets, firms have no market power. They are “price takers.” They make decisions based on the market price, which they are powerless to influence.
In markets that are not perfectly competitive (which describes most markets), most firms have some degree of market power.
Strategy in the absence of market power
Firms cannot influence price and, because products are not unique, they cannot influence demand by advertising or product differentiation.
Managers in this environment maximize profit by minimizing cost, through the efficient use of resources, and by determining the quantity to produce.
https://azpapers.com/imperfect-competition-market-analysis/
Key Diagrams for A2 Business Microeconomicstutor2u
1. The document provides advice on drawing effective diagrams for exam questions, including making diagrams at least half an A4 page, labeling axes clearly, and drawing diagrams at the appropriate technical level required.
2. It then lists 20 common diagrams that may be included in revision materials or exams, covering topics like diminishing returns, costs curves, revenue curves, perfect competition, monopoly, and oligopoly models.
3. The key messages are to practice common exam diagrams to improve accuracy, and to draw diagrams that match the technical specification required rather than oversimplifying the analysis.
This document provides an overview of monopoly market structure. It defines monopoly as a market with a single seller, no close substitutes for the product, and high barriers to entry. Barriers include legal protections like patents, economies of scale, and ownership of necessary resources. A monopoly faces a downward-sloping demand curve and sets price above marginal cost to maximize profits where marginal revenue equals marginal cost. This results in lower output and higher prices than under perfect competition, reducing consumer surplus and creating deadweight loss.
This document discusses market power and factors that lead to monopoly power. It provides examples of competitive markets and benefits of competition, such as lower prices and innovation. However, some markets fail to be competitive. The document then examines costs of monopoly power, such as higher prices and inefficiency. It also analyzes how firms with market power can extract consumer surplus. Finally, it discusses potential benefits of monopoly power and ways governments regulate monopolies.
A monopoly is a firm that is the sole seller of a product without close substitutes. It faces a downward-sloping demand curve and sets price above marginal cost. While a monopoly maximizes profits by producing where marginal cost equals marginal revenue, it produces less than the efficient quantity, resulting in deadweight loss. Governments address monopoly inefficiencies through antitrust laws, price regulation, or public ownership.
The document discusses the concept of perfect competition. It defines perfect competition as a market with many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition in the short run, firms are price takers and will produce at the price that maximizes their profits where marginal revenue equals marginal cost. In the long run, perfectly competitive firms will earn only normal profits as entry and exit will cause prices to adjust until average costs are equal to prices.
This document provides definitions for various business economics concepts. Some key points include:
- Abnormal profit refers to profits above normal levels due to barriers to entry preventing competition.
- Oligopoly is a market structure with a small number of producers where each considers the actions of others.
- Economies of scale refer to lower long-run average costs from increased output, while diseconomies are higher costs from outputs beyond the optimal scale.
- Barriers to entry protect incumbent firms by making entry difficult for new competitors.
A firm’s pricing market power depends on its competitive environment.
In perfectly competitive markets, firms have no market power. They are “price takers.” They make decisions based on the market price, which they are powerless to influence.
In markets that are not perfectly competitive (which describes most markets), most firms have some degree of market power.
Strategy in the absence of market power
Firms cannot influence price and, because products are not unique, they cannot influence demand by advertising or product differentiation.
Managers in this environment maximize profit by minimizing cost, through the efficient use of resources, and by determining the quantity to produce.
https://azpapers.com/imperfect-competition-market-analysis/
This document provides an overview of perfect competition, including market structure characteristics, pricing and output decisions, and profit maximization. It defines perfect competition as having many small firms producing identical products, free entry and exit into the market, and firms being price takers. The summary is as follows:
1. Under perfect competition, firms are price takers and maximize profits by producing where price equals marginal cost.
2. The demand curve for an individual firm is perfectly elastic, meaning it faces the market price and can sell all it wishes at that price.
3. In the short run, a competitive firm maximizes profits by choosing the quantity where marginal revenue (equal to price) equals marginal cost, yielding maximum profit
Pricing and Output Decisions in Monopolynazirali423
1. The document discusses monopoly market structure and pricing decisions. A monopoly is characterized by a single firm that produces an entire market's supply of a good or service with no close substitutes.
2. As the sole provider, a monopoly firm has market power and faces a downward-sloping demand curve. It can influence prices and maximizes profits by reducing output and increasing price compared to competitive firms.
3. There are high barriers to entry for other firms, such as patents, licenses, and economies of scale. These barriers allow the monopoly to maintain economic profits in the long run.
Perfect Competition
Market structure is the interconnected characteristics of a market, such as the number and relative strength of buyers and sellers, degree of freedom in determining the price, level and forms of competition, extent of product differentiation and ease of entry into and exit from the market
Firms In Competetive Markets_Chapter 14_Microrconomics_G. Mankewdjalex035
This chapter discusses firms in competitive markets. It will examine how competitive firms make decisions about output levels, shutdowns, and exiting/entering the market. The chapter defines competitive markets as having many small firms, homogeneous products, and free entry and exit. Competitive firms are price takers and seek to maximize profits by producing at the quantity where marginal revenue equals marginal cost. The portion of the marginal cost curve above average variable cost represents a firm's short-run supply curve. In the long run, firms exit if price is below average total cost or enter if price is above.
The document discusses market structures, specifically perfect competition. It defines key characteristics of perfect competition including a large number of small firms, homogeneous products, free entry and exit, and firms being price takers. Under perfect competition, each firm's demand curve is perfectly elastic and marginal revenue equals price. Firms produce where price equals marginal cost to maximize profits. In the long run, normal profits are achieved as entry and exit cause supply to equal demand. Perfect competition leads to allocative and productive efficiency.
Perfect competition is a market structure with many small firms, homogeneous products, perfect information and free entry and exit. In the short run, firms maximize profits where marginal cost (MC) equals marginal revenue (MR). Abnormal profits attract new firms, lowering prices to normal profits when MC equals average cost (AC). Allocative efficiency occurs where MC equals average revenue (AR). In the long run, productive, allocative and profit maximizing efficiencies are achieved at the same output level.
The document discusses price determination in different market structures. It explains how equilibrium price is determined by the intersection of demand and supply curves. It also discusses how price changes from equilibrium in response to excess demand or supply. For each market structure - perfect competition, monopoly, monopolistic competition, and oligopoly - it provides the conditions firms use to determine the profit-maximizing price and output levels.
This revision presentation looks at profit satisficing as an alternative objective for businesses. Why might firms satisfice? What are some of the possible consequences for economic welfare and efficiency?
Unit - 3 Price & Output Determination discusses the key concepts of market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It examines revenue, profit, and price determination in both the short run and long run for perfect competition and monopoly. Monopolistic competition and oligopolies are also summarized, including how the kinked demand curve model explains price rigidity in oligopolies.
This document discusses the model of perfect competition. It outlines the key assumptions of the model including homogeneous goods, many small buyers and sellers, perfect information, and free entry and exit. The document then examines the short-run and long-run equilibrium for firms under perfect competition and how price and output are determined. It also discusses how perfect competition leads to productive and allocative economic efficiency. While the assumptions of the perfect competition model are not fully met in reality, the model provides a benchmark for understanding different market structures and their impacts.
The document discusses monopoly market structures. It defines a monopoly as a market with a single seller of a product without close substitutes. It notes that monopolies can arise through government protections, control of critical resources, or large capital requirements. The document then examines the characteristics of monopolies, including price setting behavior to maximize profits where marginal revenue equals marginal cost. It also explores various types of price discrimination strategies monopolies may use.
Students should be able to:
Understand the assumptions of perfect competition and be able to explain the behaviour of firms in this market structure.
Understand the significance of firms as price-takers in perfectly competitive markets. An understanding of the meaning of shut-down point is required. The impact of entry into and exit from the industry should be considered.
There are 4 main types of market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and marginal revenue equals price. In both the short run and long run, firms will produce where marginal cost equals marginal revenue to maximize profits. The perfectly competitive market leads to productive and allocative efficiency.
The document provides an overview of market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It defines key concepts such as market equilibrium, revenue curves, and profit maximization conditions. For each market structure, it discusses features, pricing determination, and equilibrium in both the short-run and long-run. It also provides examples of Cournot and Bertrand models of oligopoly to illustrate how firms may consider competitors' actions when setting prices and output.
This document discusses market pricing decisions and market structures using Porter's model. It covers the key market structures of perfect competition, monopoly, monopolistic competition, and oligopoly. For each structure, it examines how firms make output and pricing decisions based on factors like demand elasticity, costs, and competitors' actions. It also analyzes the implications of each market structure for public interest, including impacts on prices, output, innovation, and resource allocation. Non-price competition strategies like advertising and product development are also briefly discussed.
This document summarizes key concepts related to monopoly, including:
1) A monopoly firm is the sole seller of a product without close substitutes and can set price. It produces where marginal revenue equals marginal cost, resulting in lower output and higher prices than perfect competition.
2) Monopoly power can be measured by the Lerner Index, which is the excess of price over marginal cost as a proportion of price. Monopoly power is greater when demand is less elastic.
3) A monopoly faces a downward sloping demand curve. Changes in costs, demand, or taxes affect price and quantity in complex ways depending on the elasticity of demand.
11 perfect competition class economics slides for kugannibhai
This document provides an overview of the key concepts of perfect competition, including:
(1) Perfect competition is defined by many small firms, homogeneous products, perfect information and free entry/exit.
(2) In perfect competition, each firm is a price taker and faces a horizontal demand curve equal to the market price.
(3) A perfectly competitive firm will produce where price equals marginal cost to maximize profits in both the short and long run.
(4) Long run competitive equilibrium exists when there are no incentives for firms to enter/exit the industry or change output levels.
Macro Economics
For downloading this contact- bikashkumar.bk100@gmail.com
Prepared by Students of University of Rajshahi
Afridi Hasan
Shahidul Islam
Aminul Islam Milon
Md. Maznur Rahman
Abdullah Al Mamon
This document summarizes the key assumptions and characteristics of a perfectly competitive market. It outlines that in a perfectly competitive market there are many small firms, homogeneous products, free entry and exit of businesses, and complete information. It provides examples of markets like street markets that more closely resemble perfect competition than others like bookmakers. The document then examines the market interactions under perfect competition, including the determination of market price and quantity from the intersection of supply and demand. It explores how individual firms are price takers and earn only normal profits in the long run. Finally, it discusses how perfect competition leads to allocative, productive, and dynamic efficiency, though dynamic efficiency may be limited without innovation incentives.
There are several types of market structures that can exist based on the level of competition. Perfect competition occurs when many small firms produce identical goods and all firms and consumers have perfect information. Monopolies exist when there is only one seller of a unique product with no close substitutes and barriers to entry prevent competition. Oligopolies are markets with only a few large firms where the actions of one firm impact others. Monopolistic competition involves many firms with differentiated but similar products and free entry/exit in the long run.
Chapter 2 detailed on market structures.pptnatan82253
This document discusses market structures and pricing under perfect competition and monopoly. It begins by defining key economic concepts like price, market structures, and competitiveness. It then examines the characteristics and profit maximization process of perfectly competitive firms in both the short-run and long-run. Key points are that competitive firms are price-takers and produce where price equals marginal cost. The document also analyzes monopoly market structure, noting that monopolists face downward sloping demand and are price-setters that produce where marginal revenue equals marginal cost to maximize profits. Barriers to entry allow monopolies to earn economic profits in the long-run.
The market is made up of buyers and sellers who conduct exchange transactions. Markets can be classified based on area, the nature of transactions, volume, time period, and level of competition. Under perfect competition, there are many small firms and homogeneous products. Individual firms are price takers and maximize profits where marginal revenue equals marginal cost. Monopolies have single firms and differentiated products, allowing them to be price makers that also set output at the point where marginal revenue equals marginal cost. Oligopolies feature a few interdependent firms, and pricing may involve price leadership or tacit collusion to coordinate prices.
This document provides an overview of perfect competition, including market structure characteristics, pricing and output decisions, and profit maximization. It defines perfect competition as having many small firms producing identical products, free entry and exit into the market, and firms being price takers. The summary is as follows:
1. Under perfect competition, firms are price takers and maximize profits by producing where price equals marginal cost.
2. The demand curve for an individual firm is perfectly elastic, meaning it faces the market price and can sell all it wishes at that price.
3. In the short run, a competitive firm maximizes profits by choosing the quantity where marginal revenue (equal to price) equals marginal cost, yielding maximum profit
Pricing and Output Decisions in Monopolynazirali423
1. The document discusses monopoly market structure and pricing decisions. A monopoly is characterized by a single firm that produces an entire market's supply of a good or service with no close substitutes.
2. As the sole provider, a monopoly firm has market power and faces a downward-sloping demand curve. It can influence prices and maximizes profits by reducing output and increasing price compared to competitive firms.
3. There are high barriers to entry for other firms, such as patents, licenses, and economies of scale. These barriers allow the monopoly to maintain economic profits in the long run.
Perfect Competition
Market structure is the interconnected characteristics of a market, such as the number and relative strength of buyers and sellers, degree of freedom in determining the price, level and forms of competition, extent of product differentiation and ease of entry into and exit from the market
Firms In Competetive Markets_Chapter 14_Microrconomics_G. Mankewdjalex035
This chapter discusses firms in competitive markets. It will examine how competitive firms make decisions about output levels, shutdowns, and exiting/entering the market. The chapter defines competitive markets as having many small firms, homogeneous products, and free entry and exit. Competitive firms are price takers and seek to maximize profits by producing at the quantity where marginal revenue equals marginal cost. The portion of the marginal cost curve above average variable cost represents a firm's short-run supply curve. In the long run, firms exit if price is below average total cost or enter if price is above.
The document discusses market structures, specifically perfect competition. It defines key characteristics of perfect competition including a large number of small firms, homogeneous products, free entry and exit, and firms being price takers. Under perfect competition, each firm's demand curve is perfectly elastic and marginal revenue equals price. Firms produce where price equals marginal cost to maximize profits. In the long run, normal profits are achieved as entry and exit cause supply to equal demand. Perfect competition leads to allocative and productive efficiency.
Perfect competition is a market structure with many small firms, homogeneous products, perfect information and free entry and exit. In the short run, firms maximize profits where marginal cost (MC) equals marginal revenue (MR). Abnormal profits attract new firms, lowering prices to normal profits when MC equals average cost (AC). Allocative efficiency occurs where MC equals average revenue (AR). In the long run, productive, allocative and profit maximizing efficiencies are achieved at the same output level.
The document discusses price determination in different market structures. It explains how equilibrium price is determined by the intersection of demand and supply curves. It also discusses how price changes from equilibrium in response to excess demand or supply. For each market structure - perfect competition, monopoly, monopolistic competition, and oligopoly - it provides the conditions firms use to determine the profit-maximizing price and output levels.
This revision presentation looks at profit satisficing as an alternative objective for businesses. Why might firms satisfice? What are some of the possible consequences for economic welfare and efficiency?
Unit - 3 Price & Output Determination discusses the key concepts of market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It examines revenue, profit, and price determination in both the short run and long run for perfect competition and monopoly. Monopolistic competition and oligopolies are also summarized, including how the kinked demand curve model explains price rigidity in oligopolies.
This document discusses the model of perfect competition. It outlines the key assumptions of the model including homogeneous goods, many small buyers and sellers, perfect information, and free entry and exit. The document then examines the short-run and long-run equilibrium for firms under perfect competition and how price and output are determined. It also discusses how perfect competition leads to productive and allocative economic efficiency. While the assumptions of the perfect competition model are not fully met in reality, the model provides a benchmark for understanding different market structures and their impacts.
The document discusses monopoly market structures. It defines a monopoly as a market with a single seller of a product without close substitutes. It notes that monopolies can arise through government protections, control of critical resources, or large capital requirements. The document then examines the characteristics of monopolies, including price setting behavior to maximize profits where marginal revenue equals marginal cost. It also explores various types of price discrimination strategies monopolies may use.
Students should be able to:
Understand the assumptions of perfect competition and be able to explain the behaviour of firms in this market structure.
Understand the significance of firms as price-takers in perfectly competitive markets. An understanding of the meaning of shut-down point is required. The impact of entry into and exit from the industry should be considered.
There are 4 main types of market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and marginal revenue equals price. In both the short run and long run, firms will produce where marginal cost equals marginal revenue to maximize profits. The perfectly competitive market leads to productive and allocative efficiency.
The document provides an overview of market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It defines key concepts such as market equilibrium, revenue curves, and profit maximization conditions. For each market structure, it discusses features, pricing determination, and equilibrium in both the short-run and long-run. It also provides examples of Cournot and Bertrand models of oligopoly to illustrate how firms may consider competitors' actions when setting prices and output.
This document discusses market pricing decisions and market structures using Porter's model. It covers the key market structures of perfect competition, monopoly, monopolistic competition, and oligopoly. For each structure, it examines how firms make output and pricing decisions based on factors like demand elasticity, costs, and competitors' actions. It also analyzes the implications of each market structure for public interest, including impacts on prices, output, innovation, and resource allocation. Non-price competition strategies like advertising and product development are also briefly discussed.
This document summarizes key concepts related to monopoly, including:
1) A monopoly firm is the sole seller of a product without close substitutes and can set price. It produces where marginal revenue equals marginal cost, resulting in lower output and higher prices than perfect competition.
2) Monopoly power can be measured by the Lerner Index, which is the excess of price over marginal cost as a proportion of price. Monopoly power is greater when demand is less elastic.
3) A monopoly faces a downward sloping demand curve. Changes in costs, demand, or taxes affect price and quantity in complex ways depending on the elasticity of demand.
11 perfect competition class economics slides for kugannibhai
This document provides an overview of the key concepts of perfect competition, including:
(1) Perfect competition is defined by many small firms, homogeneous products, perfect information and free entry/exit.
(2) In perfect competition, each firm is a price taker and faces a horizontal demand curve equal to the market price.
(3) A perfectly competitive firm will produce where price equals marginal cost to maximize profits in both the short and long run.
(4) Long run competitive equilibrium exists when there are no incentives for firms to enter/exit the industry or change output levels.
Macro Economics
For downloading this contact- bikashkumar.bk100@gmail.com
Prepared by Students of University of Rajshahi
Afridi Hasan
Shahidul Islam
Aminul Islam Milon
Md. Maznur Rahman
Abdullah Al Mamon
This document summarizes the key assumptions and characteristics of a perfectly competitive market. It outlines that in a perfectly competitive market there are many small firms, homogeneous products, free entry and exit of businesses, and complete information. It provides examples of markets like street markets that more closely resemble perfect competition than others like bookmakers. The document then examines the market interactions under perfect competition, including the determination of market price and quantity from the intersection of supply and demand. It explores how individual firms are price takers and earn only normal profits in the long run. Finally, it discusses how perfect competition leads to allocative, productive, and dynamic efficiency, though dynamic efficiency may be limited without innovation incentives.
There are several types of market structures that can exist based on the level of competition. Perfect competition occurs when many small firms produce identical goods and all firms and consumers have perfect information. Monopolies exist when there is only one seller of a unique product with no close substitutes and barriers to entry prevent competition. Oligopolies are markets with only a few large firms where the actions of one firm impact others. Monopolistic competition involves many firms with differentiated but similar products and free entry/exit in the long run.
Chapter 2 detailed on market structures.pptnatan82253
This document discusses market structures and pricing under perfect competition and monopoly. It begins by defining key economic concepts like price, market structures, and competitiveness. It then examines the characteristics and profit maximization process of perfectly competitive firms in both the short-run and long-run. Key points are that competitive firms are price-takers and produce where price equals marginal cost. The document also analyzes monopoly market structure, noting that monopolists face downward sloping demand and are price-setters that produce where marginal revenue equals marginal cost to maximize profits. Barriers to entry allow monopolies to earn economic profits in the long-run.
The market is made up of buyers and sellers who conduct exchange transactions. Markets can be classified based on area, the nature of transactions, volume, time period, and level of competition. Under perfect competition, there are many small firms and homogeneous products. Individual firms are price takers and maximize profits where marginal revenue equals marginal cost. Monopolies have single firms and differentiated products, allowing them to be price makers that also set output at the point where marginal revenue equals marginal cost. Oligopolies feature a few interdependent firms, and pricing may involve price leadership or tacit collusion to coordinate prices.
Market Forms - Perfect competition, Monopoly, Monopsony, Oligopoly.pptxHimaanHarish
The document discusses different market forms including perfect competition, monopoly, monopolistic competition, and oligopoly. It describes their key features such as number of buyers/sellers, barriers to entry, product differentiation, and interdependence between firms. The document also defines monopsony and provides an employment example. Furthermore, it explains the equilibrium conditions for a perfectly competitive firm in the short run in terms of marginal cost equaling marginal revenue and the shutdown point where average costs exceed average revenue.
This document provides an overview of different types of markets and market structures. It discusses markets based on geographic area, nature of transactions, volume of business, time, and level of competition. Key market structures covered include perfect competition, monopoly, monopolistic competition, oligopoly, and duopoly. Pricing strategies such as cost-based pricing, product life cycle pricing, and other approaches are also summarized.
The document defines and discusses different types of markets. A market brings buyers and sellers into contact and enables an exchange to take place. Markets can be classified by area, nature of transactions, volume of business, time period, and status of sellers. Competition in a market depends on substitutability, interdependence, and ease of entry. Equilibrium price is where quantity demanded equals quantity supplied. Under perfect competition, firms are price takers and quantity supplied equals marginal cost. Monopolies have a single seller and influence price. Monopolistic competition involves differentiated products, while oligopolies have few dominant sellers.
Be chap5 competitive, monopoly, monopolistic competitive marketsfadzliskc
This document provides an overview of different market structures including perfect competition, monopoly, and monopolistic competition. It defines key characteristics of each market structure and explains how firms determine price and output to maximize profits or minimize losses in the short run and long run. The document also discusses sources of monopoly power and how monopolies, unlike competitive firms, do not have a supply curve. It analyzes the social costs of monopoly power through deadweight loss.
This document provides an overview of different market structures:
- Perfect competition is characterized by many small firms, homogeneous products, perfect information and free entry/exit. Firms are price-takers and earn zero profits in the long run.
- Monopolies have a single firm, barriers to entry, downward sloping demand and set price above marginal cost to earn profits.
- Monopolistic competition has many small firms, differentiated products, free entry/exit. In the short run firms earn profits but in the long run entry drives profits to zero as under perfect competition.
The document discusses different market structures and pricing strategies. It begins by defining a market and classifying markets based on competition. There are three main classifications discussed - perfect competition, imperfect competition (monopoly, oligopoly, monopolistic competition), and pure competition. The summary then discusses key aspects of each market structure, including price determination under different conditions. Pricing strategies like full cost pricing, product line pricing, and descriptive pricing approaches are also summarized at a high level.
1. Perfect competition is characterized by many small firms and buyers, homogeneous products, free entry and exit, and perfect information.
2. Under perfect competition, firms are price takers and cannot influence the market price. They must sell at the going market price.
3. In the short run, a perfectly competitive firm will produce at the quantity where marginal revenue equals marginal cost to maximize profits. In the long run, firms will enter or exit the market until economic profits are driven down to zero.
1) The document discusses various concepts in microeconomics including monopoly, monopolistic competition, and price discrimination.
2) Under monopoly, a profit-maximizing firm will produce the quantity where marginal revenue equals marginal cost. This maximizes profits.
3) Under monopolistic competition, firms produce differentiated products and free entry leads to zero economic profits in the long-run. However, price still exceeds marginal cost, resulting in some deadweight loss.
4) Price discrimination allows firms to charge different prices to different customers. Perfect first-degree price discrimination involves charging each customer their reservation price. This maximizes a firm's profits.
This document provides a syllabus and information about market structures and pricing. It discusses the key topics of perfect competition, monopoly, monopolistic competition, and oligopoly. For each market structure, it defines the characteristics, discusses demand and supply curves, profit levels in the short-run and long-run equilibrium, and provides examples. The summary focuses on the essential market structure models and equilibrium concepts covered.
Monopolistic competition is characterized by many small firms that produce differentiated products. In the short run, firms can earn economic profits by producing at a quantity where marginal revenue equals marginal cost. However, in the long run, free entry and exit causes the demand curve to shift left as more firms enter, eliminating economic profits and resulting in normal profits for firms. Firms produce at the minimum point of their average total cost curve where price equals average cost.
This document provides summaries of presentations on business economics topics by various students:
1. Priya Khandelwal presented on the characteristics of oligopoly markets and kink demand curves.
2. Priska Haria discussed short and long run equilibrium in monopolistic competition.
3. Mohit Joshi covered short and long run equilibrium in monopoly markets.
4. Divit Dholabhai presented on different market structures like perfect competition, monopoly, oligopoly, and monopolistic competition.
5. Ayush Chaudhary summarized the concept of break even point in economics.
Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information. Prices are determined in the very short run, short run, and long run. In the very short run prices are fixed as firms cannot adjust output levels. In the short run firms can adjust variable inputs and earn super normal profits if prices are above average total costs. In the long run all firms earn only normal profits as entry and exit continue until prices equal minimum average total costs.
The document summarizes different market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. It defines each structure and provides examples of characteristics like number of sellers, product differentiation, barriers to entry, profit levels, and pricing behavior. Perfect competition has many small sellers of identical products, while monopoly has a single seller of unique products. Monopolistic competition and oligopoly involve intermediate levels of competition between differentiated products.
1) The document discusses monopoly as a market structure characterized by a single seller of a unique product or service with significant barriers to entry.
2) Under monopoly, output is lower and prices are higher than under perfect competition, resulting in inefficient production. A monopolist faces a downward-sloping demand curve and sets price along the curve.
3) The monopolist maximizes profits by producing at the quantity where marginal revenue equals marginal cost, resulting in economic profits as average revenue exceeds average costs. The monopoly can earn economic profits even in the long run due to barriers to entry.
Perfect competition requires: firms are price takers, many sellers/buyers, free entry/exit, identical products, complete information. In short-run, individual firms maximize profits where marginal cost (MC) equals marginal revenue (MR). Market supply is the sum of individual firm MC curves. In long-run, zero economic profits are achieved as new entry drives prices down until MC equals average costs.
This document discusses market structures and concepts related to profit maximization. It begins by outlining the goals of firms, including profit maximization, growth, sales/revenue maximization, and market dominance. It then defines revenue, profit, normal profits, abnormal profits, and losses.
The document proceeds to describe four major market structures - perfect competition, monopoly, monopolistic competition, and oligopoly. It provides assumptions, characteristics, profit maximization conditions, and graphs for each market structure. Finally, it discusses natural monopoly, price discrimination, and concludes with a description of monopolistic competition.
A monopoly is characterized by a single seller that produces a unique product with few substitutes and operates in a market with high barriers to entry. Monopolies may earn long-run profits by producing less output than would exist under perfect competition and charging higher prices. While this leads to deadweight loss, monopolies can persist due to barriers like control of resources, economies of scale, or patents. Governments address monopolies through policies like breaking up firms, reducing trade barriers, price regulation, or natural monopoly regulation.
Unlock Your Potential with NCVT MIS.pptxcosmo-soil
The NCVT MIS Certificate, issued by the National Council for Vocational Training (NCVT), is a crucial credential for skill development in India. Recognized nationwide, it verifies vocational training across diverse trades, enhancing employment prospects, standardizing training quality, and promoting self-employment. This certification is integral to India's growing labor force, fostering skill development and economic growth.
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Optimizing Net Interest Margin (NIM) in the Financial Sector (With Examples).pdfshruti1menon2
NIM is calculated as the difference between interest income earned and interest expenses paid, divided by interest-earning assets.
Importance: NIM serves as a critical measure of a financial institution's profitability and operational efficiency. It reflects how effectively the institution is utilizing its interest-earning assets to generate income while managing interest costs.
Vicinity Jobs’ data includes more than three million 2023 OJPs and thousands of skills. Most skills appear in less than 0.02% of job postings, so most postings rely on a small subset of commonly used terms, like teamwork.
Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
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A toxic combination of 15 years of low growth, and four decades of high inequality, has left Britain poorer and falling behind its peers. Productivity growth is weak and public investment is low, while wages today are no higher than they were before the financial crisis. Britain needs a new economic strategy to lift itself out of stagnation.
Scotland is in many ways a microcosm of this challenge. It has become a hub for creative industries, is home to several world-class universities and a thriving community of businesses – strengths that need to be harness and leveraged. But it also has high levels of deprivation, with homelessness reaching a record high and nearly half a million people living in very deep poverty last year. Scotland won’t be truly thriving unless it finds ways to ensure that all its inhabitants benefit from growth and investment. This is the central challenge facing policy makers both in Holyrood and Westminster.
What should a new national economic strategy for Scotland include? What would the pursuit of stronger economic growth mean for local, national and UK-wide policy makers? How will economic change affect the jobs we do, the places we live and the businesses we work for? And what are the prospects for cities like Glasgow, and nations like Scotland, in rising to these challenges?
2. PRICING AND OUTPUT FOR
PROFIT MAXIMISATION
• To recap; firms aim at profit maximization.
• In order therefore to determine the output and
price which maximizes profits firms will produce
up to the point where the marginal revenue is
equal to the marginal cost. At this point, output
produced and price charged maximizes profits.
• This condition is also referred to as the golden
rule or marginalist principle. Therefore price and
output which maximize profit are attained when:
MR = MC.
3. MARKET STRUCTURE
• Market defined
• A market is an interpersonal institution, which brings
together buyers and sellers of commodities or services.
• Markets are categorized into perfect and imperfect
markets based on the following criterion: -
- Number and size of the buyers and sellers of a product.
- The type of product bought and sold whether
homogeneous or differentiated.
- The degree of mobility of resources meaning the extent
to which firms can enter and exit the market.
- The extent to which information on prices, costs demand
and supply conditions are available.
4. PERFECT COMPETITION
• The perfect competitive market structure is the unique competitive
market described by the following characteristics: -
• - There are many buyers and sellers of a product, each too small
to affect the price of the product.
• - The product being traded is standard or homogeneous. Each
seller’s product is identical to its competitor’s.
• - There is freedom of entry and exit in the market. Thus there
are no significant obstacles preventing firms from entering or leaving
the industry.
• - Economic agents (i.e. firms and consumers) have perfect
knowledge of market conditions.
• - Individual firms must accept the market price. They are price
takers and can exert no influence on price.
5. PERFECT COMPETITION
• The above characteristics are difficult to meet in practice although
many international markets in commodities and financial markets
come very close;
• however, the model is still useful because perfect competition is a
benchmark of economic efficiency.
• Price and output determination
• In a perfectly competitive market, the market price of a product is
determined at the intersection of the market demand curve and
market supply curve of the product. The perfectly competitive firm is
then a price taker and therefore can sell any quantity of that
commodity at that price.
• The best level of output of a firm in the short run is given at the point
at which price (P) or marginal revenue (MR) equals marginal cost
(MC). This is true as long as P exceeds the average variable cost
(AVC) of the firm
6. PERFECT COMPETITION
• Short run equilibrium:
• In the short run, one input used in the production process is fixed.
Therefore depending on the relationship between the price of the
commodity and average cost, in the short run a firm can earn
economic profits (P>ATC), incur losses (P<ATC) or just break even
(P=ATC).
• Long run equilibrium
• In the long run, the firm will build the optimal scale of plant to
produce the best level of output. This is possible because all factors
used in the production process are adjustable (variable). The
existence of profits will attract more firms into the industry, while
losses will cause some firms to leave it. This proceeds until the long
run equilibrium is reached, at which all firms produce at the price
that equals the lowest point on the long run average cost (LAC)
curve, and all firms break even. (P=LMC=LMR=LATC).
8. EFFICIENCY IMPLICATIONS OF
PERFECT COMPETITION
• The perfect competitive market is considered efficient as
it allocates economic resources efficiently through the
price mechanism.
• Attains allocative and productive efficiency. Productive
efficiency is attained when P=min LATC. Allocative
efficiency is attained when P = LMC.
• Output produced is optimal.One reason for this is that at
the point of long- run equilibrium firms only earn “normal
profit”.
• Normal profit is the minimum level of profit, or return on
capital employed, necessary to keep a firm in production
in the long-run. Normal profit is a cost and is included in
the average cost curve.
•
9. EXAMPLES OF PERFECT
COMPETITION
• Examples of perfect competition:
• Although it is difficult to meet the characteristics of
perfect competition in full, we do have few examples in
financial markets, which reflect perfect competition.
• The functioning of the stock exchange and foreign
exchange market demonstrates very good examples of
the functioning of perfect competition.
• Both markets are composed of many buyers and
sellers. Money or stock/shares are homogeneous in a
sense. The flow of information in these two markets is
swift and readily available to players in the market
because of developments in information technology.
10. MONOPLOY
• A pure monopoly market structure is defined as a single firm
producing a product for which there is no close substitute.
• The basic characteristics that explain pure monopoly are as follows:
• - There is a single seller so the firm and the industry are
synonymous.
• - There are no close substitutes for the firm’s product.
• - The firm is a “price maker” that is, the firm has considerable
control over the price because it can control the quantity supplied.
• - Entry into the industry by other firms is blocked.
• - A monopolist may or may not advertise, depending on the
nature of its products. Advertising may be done to increase
demand.
• Dominant examples of pure monopoly in practice include public
utilities like electricity and water. Local examples include Tanesco
for electricity and Dawasa for water.
11. MONOPLOY
• Sources of monopoly
• Why should monopolies exist in practice? This question can be
answered by examining the barriers to entry, which limit
competition in the market structure. These barriers are explained
as follows:
– Existence of economies of scale. In the long run, average cost
may fall over a sufficiently large range of outputs as to leave
only one firm supplying the entire market. Existence of
economic of scale implies that it is only efficient to have only
one big firm to supply the entire market rather than having
many small firms operating at high costs.
– Legal barriers in terms of patents and licenses.
• Patents grant the investor the exclusive to produce or license a
product for a good number of years. This exclusive right earns
profit for future research, which in turn results into more patents
and monopoly profits. Government licenses are another form of
entry barrier.
12. MONOPOLY
– Ownership of essential resources.
• A firm may control the entire supply of raw materials required to
produce a product. This situation directly creates a monopoly.
Examples include the ownership of land that has diamond reserves;
hence Mwadui Diamond Company Ltd. controls almost all Tanzania
diamond supplies.
– Government Legislation
• Government through legislation can also create monopolies. The
government may decide to allow one producer in certain services or
sectors for example when Tanzania adopted the Arusha Declaration
in 1967, all private commercial banks were nationalized and the
government established the National Bank of Commerce (NBC) as
the only commercial bank.
13. Price and output
determination(Monopoly)
• Price and output determination
• As in the perfect competitive market, a monopolist is guided by
the golden rule of MR = MC in determining its profit maximizing
output and price. In addition, a monopolist faces a downward
sloping market demand curve and the usual U-shaped marginal
and average cost curves.
• Short run equilibrium:
• In the short run a monopolist can either earn economic profits (P>
ATC), economic losses (P<ATC) or just break even (P=ATC)
depending on the relationship between the average cost and the
price of the commodity.
14. Price and output determination(Monopoly
• Long run equilibrium:
• However, in the long run, all inputs and costs of production are
variable and hence the monopolist can select the optimal scale or
plant to produce the best level of output.
• If a monopolist earns short run economic profits, in the long run
economic profits will tend to persist as there are barriers to entry and
no competition.
• Likewise, if a monopolist experiences short run economic losses it
will be forced to look for other profitable uses of its resources or else
it will leave the industry in the long run.
• Hence it can be concluded that the long run equilibrium of a firm
under monopoly market structure is characterized by the existence
of economic profits. The price charged is greater than the long run
average costs incurred in producing equilibrium output (P>LATC).
• A monopolist in the long run will enjoy economic profits Note well,
however, that a firm in a monopoly position will only make a profit if
there is sufficient demand for its output compared with its costs. The
existence of a monopoly right does not guarantee a profit unless the
good or service in question is demanded.
16. Regulation of monopoly
• Regulation of monopoly
We have observed that in practice the existence of
monopoly is unavoidable because of economies
of scale (natural monopolies). Therefore to
correct for monopoly inefficiency government
regulates monopoly.
One way of regulating activities of a monopolist to
tax his excess profits so that he can earn only
normal profit.
On the other hand, the monopolist may be
regulated by forcing it to charge a price equal to
its long average cost.
17. WELFARE EFFECTS OF
MONOPOLY
• Comparing perfect competition and monopoly market structures.
• Monopoly charges a higher price and produces a lower output level.
Perfect competition charges a lower price and produces a higher
output level.
• High consumer surplus in perfect competition. Consumer surplus
reduced in monopoly market structure.
• Consumer surplus is the difference between what a consumer was
willing to pay and what he/she actually pays in the market.
• Consumer deadweight loss represents the reduction in consumer
surplus that is not captured as an income transfer to a monopolist
• Producer deadweight arises when society’s resources are
inefficiently employed because the monopolist does not produce at
the minimum per unit cost.
18. MONOPOLISTIC COMPETITION
– Description of Monopolistic competition
• Monopolistic competition refers to a market structure with a
relatively large number of sellers offering similar but not identical
products. This market structure is a hybrid of perfect competition
and monopoly in the sense that it borrows characteristics from
both.
– Characteristics of Monopolistic Competition
• Products sold are differentiated. Differentiated products are
those, which are similar but not identical and satisfy the same
basic need.
• The number of sellers is large enough for each to act
independently of each other.
• There is free entry and exit.
• There is limited influence on price charged because of customer
loyalty caused by product differentiation.
19. MONOPOLISTIC COMPETITION
• Product differentiation distinguishes this market structure from pure
competition. Economic rivalry is dominated by non-price
competition. Product differentiation can either be physical or
qualitative.
• Ways or methods used to practice product differentiation may
include: -
-Services and conditions accompanying the sale of the product.
-Location of the firm.
-Promotion activities.
-Packaging.
-Advertisement.
• Monopolistic competition is most common in the retail and service
sectors. Examples include retail shops, petrol stations, restaurants,
fast food outlets etc.
20. Price and output
determination(Monopolistic
Competition)
• The monopolistic competitive firm faces a demand curve, which is
highly, but not perfect elastic. The demand curve is more elastic
than the monopoly’s demand curve because the seller has many
close substitutes.
• In addition it is elastic than pure competition because of product
differentiation which brings about limited control over price charged
by monopolistic competitive firms. Firms set price and output
maximizing profits at the point where MR = MC.
• Short run equilibrium:
• In the short run, depending on the relationship between the price
and average cost curves, a monopolistic competitive firm can earn
economic profits(P>ATC), economic losses (P<ATC) or just break
even (P=ATC).
21. EQUILIBRIUM IN MONOPOLISTIC
COMPETITION
• Long run equilibrium:
• Since there is free entry and exit, any economic profits earned
will attract more firms up to a point where existing firms just earn
normal profits.
• Hence the long run equilibrium of monopolistic competitive firms
is attained when firms just receive normal profits (zero economic
profits) i.e. (P=LATC).
• However, it is important to note that firms in monopolistic
competition do not produce at the minimum average cost i.e. (P is
not equal to Min LATC). This is because firms incur extra cost in
differentiating their products.
• Hence firms charge a higher price and produce a lower output as
compared to perfect competition. This market is also characterized
by firms operating to the left of the minimum point on their LATC
curve. This phenomenon is described as existence of “excess
capacity”.
22. EFFICIENCY IMPLICATIONS OF
MONOPOLISTIC COMPETITION
• The market is not considered efficient because:
(i) does not produce at the minimum cost. P is
not equal to min LATC.
• It is important to note that although production is
less efficient, the consumer is rewarded with
product variety.
• This market enhances consumer sovereignty.
23. OLIGOPOLY
• Oligopoly
• Description of Oligopoly
• An oligopoly market structure is dominated by few large
firms producing a homogeneous or differentiated
product. If there are only two sellers than the market is
termed as duopoly.
• The distinguishing feature of oligopolistic or duopolistic
market structures, especially compared with perfect
competition or monopoly, is not simply a matter of the
number of the firms in the industry. Rather, it is the
degree to which output, pricing, and other decisions of
one firm affect, and are affected by, similar decisions
made by other firms in the industry.
• What is important is the interdependence of the
managerial decisions among the various firms in the
industry.
24. OLIGOPOLY
• Characteristics of Oligopoly
• The oligopoly market structure is defined by the following
characteristics:
• - Market is dominated by few big firms who either
produce standardized or differentiated products.
• - Because of fewness, firms are mutually
interdependent, that is each firm must consider its rivals
reactions in response to its decisions abut price and
output.
• There are restrictions or obstacles in entering the
market.
• - Non price competition in form of advertising, product
differentiation and sales promotion is dominant.
• - The sources of oligopoly are similar to that of
monopoly and include existence off economies of scale,
control of raw materials, patents, substantial advertising
25. OLIGOPOLY
• Very distinctive feature of Oligopoly is the interdependence of firms
in pricing and output decisions. Since firms are few, each firm
controls a certain percentage of the market share. So any action by
one firm will affect the market share of another.
• For example if Coca-Cola Company limited decreases its price for
coca-cola, the market share for Pepsi Company Limited will be
affected it does not respond by reducing its price.
• Hence other firms closely watch any action taken by a rival firm and
they respond to defend their market share. Oligopoly is most
dominant in the manufacturing industry.
• Examples of Oligopoly in the Tanzania context include the following:
• Brewing industry (Tanzania Breweries Limited and Associated
Brewery).
• Cement industry (Wazo Hill Cement, Tanga Cement and Mbeya
Cement).
• Soft drinks industry (Coca-Cola and Pepsi Cola). Mobile phone
providers(Tigo, Vodacom, Zain, Zantel, TTCL)
• Other examples include manufacturing in the computer, automobile,
steel and aluminum industry.
26. Short and long run equilibrium in
Oligopoly:
• As indicated earlier, the distinctive characteristic of oligopolies and
duopolies is the interdependence of firms. Where collusion is
prohibited by law, oligopolistic behaviuor may be presented as a non
cooperative game in which the actions of one firm to increase
market share will, unless countered, result in a reduction of the
market share of other firms in the industry.
• Thus action will be followed by reaction. It is therefore difficult to
determine the short and long run equilibrium of oligopoly and
duopoly because of the many ways in which firms deal with this
interdependence.
• Thus there is no general theory to explain this interdependence.
27. Selected Oligopoly theories
• Kinked demand curve model.
Tries to explain the price rigidities in the oligopoly market.
-Because of interdependence a price increase will result into a firm
losing market share as rival will not respond.
-A price reduction will result into a price war as rival firms will respond.
• Hence firms will tend to maintain the same price
• Collusion model
Oligopolies recognise their mutual interdependence, they might agree
to coordinate their output decisions to maximise the output of the
entire industry.
• Collusion represents a formal agreement among firms in an
oligopolistic industry to restrict competition in order to increase
industry profits.
• Collusion may take the form of explicit price fixing agreements or
output fixing agreements like OPEC.
• Most well known manifestation of of collusive behavior is the cartel.
• A cartel is an explicit agreement among firms in an oligopolistic
industry to allocate market share and or industry profits.
28. PRICING PRACTICES
• We had earlier assumed that a firm has precise knowledge about
the firm’s production , revenue and cost functions.
• For a profit maximising firm, price was assumed to be determined
at the point where MR=MC. The problem is that in practice it is
difficult to measure revenue and cost functions.
• Price discrimination
• Price discrimination refers to the practice of charging different
prices for different quantities of a product to different customers or
groups in different markets, although the price differences are not
justified by cost differences.
• In other words, price discrimination occurs when a given firm’s
prices in different markets are not related to differentials in
production and distribution costs. The motivating factor in
practicing price discrimination is the potential for increasing total
revenue and profits for a given level of sales and total costs.
29. TYPES OF PRICE
DISCRIMINATION
• First degree price discrimination
Occurs when firms charge each individual a different price for each
unit purchased. The price charged for each unit purchased is based
on the seller’s knowledge of each individual’s demand curve.
• Because it is virtually impossible to satisfy this informational
requirement, first degree price discrimination is extremely rare.
• Second degree price discrimination
• Also referred to as volume discounting
• Setting prices according to the amount purchased. Sellers attempt to
maximize profits by selling product in blocks or bundles rather than
one unit at a time.
30. TYPES OF PRICE
DISCRIMINATION
• Third degree price discrimination
Occurs when firms segment the market for a particular good or service
into easily identifiable groups, then charge each group a different
price.
• In order to practice third degree price discrimination successfully,
three conditions must be met.
• - First the firm must be able to segment the market for a product.
The firm must identify sub markets and prevent transfers among
customers in different sub markets. Segmentation of market allows
the firm to charge different prices to different groups of customers
without the possibility of inter-market leakages.
• - Price elasticities in the different sub markets must be different
in order to be able to charge different prices for the same product.
Having different price elasticities the firm would tend to charge
higher prices for inelastic market and lower price for elastic market.
• - Finally, monopoly power is needed with the ability to control
output and prices.
31. TYPES OF PRICE
DISCRIMINATION
• Price discrimination can only be practiced by firms in
markets where there is imperfect competition. Price
discrimination is common practice to firms in monopoly,
monopolistic competition and Oligopoly.
• - Examples of price discrimination include:
- different fares for first, second and third class in aero
planes, trains, ships etc.
-Different charges for telephone calls depending on time
made.
-The practice of utility companies charging lower prices to
commercial users and higher prices to residential users
etc.
-Offering different interest rates charged to big and small
borrowers.
32. OTHER PRICE PRACTICES
• Cost- Plus Pricing(mark up or full-cost pricing).
This is the practice of adding a predetermined mark up to a firm’s
estimated per unit cost of production at the time of setting the selling
price.
P = ATC(1+m),
where m is the percentage mark up over the fully allocated per unit
cost of production.
• This method is simple and easy to use.
• Peak load Pricing-Charging a higher price for a service when
demand is high and capacity is fully utilized and a lower price when
demand is low and capacity is underutilised.
• In many markets the demand for a service is higher at certain times
than at others. During such peak periods it becomes difficult to
satisfy demand of all customers. Thus a higher price is charged
during peak periods and a lower price is charged during off peak
periods.
33. OTHER PRICE PRACTICES
• Price skimming
This is an attempt by a firm that introduces a new product to extract
consumer surplus through differential pricing before competitors
develop their version of the new product.
• Charging initially the highest price possible and then reduce the
price gradually.
• Penetration pricing
• Occurs when a firm entering a new market charges a price that is
below the prevailing market price to gain a foothold in the industry.
• Prestige Pricing
• Practice of charging a higher price for a product to exploit the belief
by some consumers that a higher price means better quality, which
in turn confers on the owner greater prestige.
• This method capitalizes on snob appeal. Firms exploit this
perception by charging higher prices because of the increased
prestige that they believe ownership of their product confers.